¶1. (C/NF) Eight directors, including the CEO, of Algeria's national oil company Sonatrach are under investigation for corruption and have been fired and replaced. Industry insiders fear company operations will soon be affected. Algeria's intelligence services are leading the investigation. This scandal is the latest in a dramatically escalating series of investigations and prosecutions that we have seen since last year involving Algerian government ministries and public enterprises. Significantly, many of the ministries affected are headed by ministers considered close to Algerian President Bouteflika, including Energy /Mines Minister Chekib Khelil. Speculation is rife that political infighting between civilian and military leadership lies behind the case, but we have no hard evidence. Bouteflika's determined silence is only fueling the uncertainty. End summary.

Eight Senior Officials Implicated ---------------------------------

¶2. (U) A corruption scandal has broken involving Algeria's largest company, the state oil and gas monopoly Sonatrach. The press first reported on January 14 that an examining magistrate ordered Sonatrach's CEO Mohamed Meziane, VP for pipelines Benamar Zenasni, VP for upstream activity Boumediene Belkacem, and five other company executives to answer questions concerning allegations of irregularities in the awarding of contracts to two consulting firms owned by Meziane's sons and a supplier of security equipment. They were questioned for twenty hours.

¶3. (U) All eight Sonatrach officials were then placed under formal investigation ("judicial control") which requires a person to report periodically to police and not leave the country). Some were detained. Meziane himself was placed under judicial control; the two Sonatrach VPs were detained in Serkadji prison. An additional Sonatrach senior official, VP for commercialization Chawki Rahal, was placed under judicial control. Four Sonatrach directors (for social affairs, exploration, pipelines and transport, and commercialization) were placed under judicial control. Meziane's two sons were detained -- some stories say, for being major shareholders in companies to which the Sonatrach contracts were awarded. All efforts by defense lawyers to lift the detentions and judicial control have been rejected. Outside Sonatrach, former CEO of the bank Credit Populaire d'Algerie Hachemi Meghaoui and his son were ordered detained.

¶4. (U) Abdelhafid Feghouli, VP for downstream operations, was immediately appointed acting Sonatrach CEO. The three other VPs under suspicion have been replaced. Energy/Mines Minister Dr. Chakib Khelil, whose ministry has responsibility for Sonatrach, claimed in a January 17 press conference that the investigation had caught him unawares and that all he knew was what had been reported in the press. He has since refused to discuss the allegations or take responsibility for the affair, saying February 2 that he had no details of the charges and that he would not resign. Khelil pleaded that he was responsible for the entire energy sector but not for managing Sonatrach or any of the some 50 other state energy companies under his ministry's purview. He assured the press soon after the affair broke that Sonatrach's production would not be affected and that the company would continue to carry out all projects underway. The week of January 24, the press reported that Sonatrach lawyers would not defend the suspects, since Sonatrach was a victim of the fraud they are suspected of committing.

Foreign Producers Worried -------------------------

¶5. (C/NF) Ambassador on January 27 met XXXXXXXXXXXX. Meziane XXXXXXXXXXXX sources tell him the issue under investigation is Sonatrach's granting of sole-source contracts. Sonatrach's regulations specify strict conditionsfor this type of contract ("procedure R-115"). Only CEO Meziane would have had authority to authorize and approve them.

¶6. (C/NF) XXXXXXXXXXXX had heard that 1,600 such contracts were under investigation. Some of these contracts reportedly went through Meziane's sons. A few years earlier, Sonatrach had pressed Anadarko to enter into one such contract jointly with the U.S.-Algerian joint venture BRC (Brown and Root-Condor) to develop the el-Merk oilfield. XXXXXXXXXXXX, the contract was never carried out, BRC was liquidated, and Sonatrach in 2008 awarded the el-Merk contract to Anadarko. XXXXXXXXXXXX stated that this contract was not/not one of those under investigation. (Comment: BRC, nonetheless, figures in the list of ongoing investigations cited in the press. End comment)

¶7. (C/NF) XXXXXXXXXXXX noted that Abdelhafid Ferghouli, former VP for downstream operations now appointed interim CEO, is the one (now former) Sonatrach VP with whom Anadarko was not acquainted. XXXXXXXXXXXX doubted he would last long or beeffective in the top position. No one expects the Sonatrach executives under investigation to return to their previous positions.

Continuity of Sonatrach Operations ----------------------------------

¶8. (C/NF) Energy/Mines Minister Khelil's Jan. 17 assurances that company operations would be unaffected have not gone unchallenged. Several press reports sourced to industry insiders and experts say that fear has paralyzed Sonatrach upper ranks, who are all afraid to make a decision. XXXXXXXXXXXX view paralleled this assessment, and we have heard similar views from French -- quite concerned about Sonatrach because of the French oil company Total's exposure here -- and other diplomats. He said that all senior executives, at least in the upstream end of operations he is familiar with, are looking over their shoulders and afraid to make decisions or sign anything. The company would not sign amendments to XXXXXXXXXXXX insurance contracts on oil production necessitated by the 2009 budget amendments (Complementary Finance Law) -- contracts for which former VP for Upstream Operations Belkacem was responsible. Sonatrach had contracted foreign insurance companies to provide this insurance. Now these companies were not getting paid. Before long, they would cease insuring XXXXXXXXXXXX production operations. If that happened, work would stop. XXXXXXXXXXXX said XXXXXXXXXXXX fields are the largest upstream project with foreign participation in Algeria.

Leading Role of Algeria's Intelligence Services --------------------------------------------- --

¶9. (C) All papers report that Algeria's equivalent to the DNI, the Departement du Renseignement et de la Securite (DRS), which is no longer under the Ministry of National Defense, carried out the investigation. Although DRS' move out of the shadows and into the limelight has been unprecedented, its special investigative service for internal corruption has been active for years (i.e., even as far back as the Boumedienne era). The magazine "Jeune Afrique" recently claimed, for example, that DRS had investigated 1650 elected Algerian local officials (or about one out of ten) since 2002 for corruption. XXXXXXXXXXXX was well aware of DRS' involvement in the Sonatrach case and related that former VP Belkacem, in many meetings with XXXXXXXXXXXX, had been extremely careful in what he said when others, even company waiters, were present. He was very guarded over the telephone. XXXXXXXXXXXX imputed this behavior to concern over DRS surveillance. XXXXXXXXXXXX confided that DRS has interviewed many of XXXXXXXXXXXX company's local staff.

Political Ramifications -----------------------

¶10. (C/NF) XXXXXXXXXXXX noted that no one believe Energy/Mines Minister Khelil's claims to know nothing of the investigation. Most believe Khelil exercised a guiding hand over Sonatrach operations. XXXXXXXXXXXX noted that his conversations with industry insiders had pointed to a cousin of the minister known only as Hemche who was a close adviser to former CEO Meziane. His sources believed Hemche was a key decision-maker, although Meziane did the signing. Early last December, Hemche reportedly abruptly retired and took up residence in Lugano, Switzerland.

¶11. (C) Ambassador noted that Algiers is swirling with speculation about the political background of this and other scandals affecting several government ministries and public enterprises. Some believed it was a logical outcome of President Bouteflika's oft-stated commitment to attack corruption. Most, however, interpret the DRS move against high-level Sonatrach officials -- who all owed their jobs to Bouteflika-confidant Khelil -- as the military's retaliation via the DRS against the civilian control over it that Bouteflika had imposed since his reelection to a second term in 2004.

Comment -------

¶12. (C) The investigation against the leadership of the company that finances over half the country's budget and produces 98 percent of its export revenue has shocked the country and generated rampant speculation about the political motivations behind it. In a country where power relationships and processes are opaque, speculation is as rife as hard evidence is scarce. A visiting analyst of a leading U.S. risk analysis firm told Poloff the week of January 31, for example, that all his contacts believe the DRS shaped the investigation to send a message to Bouteflika, either that he should allow relatives of leading generals a greater slice of the economic pie, or that Bouteflika's western Algerian "clan" should cede power back to the military (which many regard as dominated by eastern Algerians), or simply that the civilian-dominated authority should restore more behind-the-scenes influence to the military. Despite this theory and others we have heard, we see no hard evidence for any particular political interpretation. What is certain is that the alleged infraction and sums involved in this corruption case may only represent the tip of an iceberg -- which was precisely the point of an open letter to the DRS published by a former Sonatrach VP January 30 in the French language daily "El Watan." That article urged the DRS to look into a long list of much large Sonatrach operations, including spot market sales to a handful of select customers connected to senior members of the power structure. The U.S. risk analyst's sources were certain the DRS planted this article as a further warning to civilian authority.

¶13. (C) This case is the latest in a series of corruption investigations that started to surface with increasing frequency since last spring and which are now competing with indignation over TSA measures and Algeria's failed bid to win the African Cup of Nations football tournament for the main headlines in the daily press. Two of the larger cases already underway are alleged wrongdoing in the construction of the East-West Highway and in the awarding of fishing licenses to Turkish companies. Others involve state-controlled telephone operator Algerie Telecom, BRC (mentioned previously), and the National Bank of Algeria. Few cases have yet produced a trial or conviction, helping harden the widespread view that leading public officials continue to enrich themselves with impunity at public expense. With DRS "commissars" believed present in virtually every public company or ministry front office, senior officials are said to be worried that every visitor, especially non-Algerians, is duly noted and reported. DRS files, already swollen with decades of political and personal financial dirt on practically all notable Algerians, are said to be growing fatter with information on suspicious business dealings or allegations of special favors. The big question no one can answer definitively is whether Bouteflika is orchestrating this anti-corruption blitz, as PM Ouyahia has publicly claimed and as would be consistent with Bouteflika's longstanding intention, or is its ultimate target. His silence, noted by the press, has only fueled the speculation. PEARCE